Gold Bear Market or Physical Gold Discount Sale?

Back in 1980, just as the Gold Price blasted upwards past $800/oz, buyers reportedly lined up in droves at various bullion dealers to participate in the rally.

Investment analyst Jay Taylor writes, “I remember 1980… there was panic buying of gold by people in the streets of New York City. They were lined up around the block to buy gold and Krugerrands at that time.” That flurry of buying ended up representing a classic top. As gold failed to move higher, the speculative frenzy soon reversed into a despondency that dragged gold into a twenty year bear cycle. For those investors who bought at the top, it was a hard lesson learned.

Fast forward to today, and in the days that have followed this past Friday’s (and Monday’s) incredible gold price smash, the strangest thing has happened: physical buyers have come out in droves, but this time they’re buying immediately following an unprecedented $200 price decline.

Consider the following:

The US Mint reported selling 63,500 ounces (2 tonnes) of gold on April 17th alone, which brought total April month-to-date sales up to 147,000 ounces – more than the previous two months of gold sales combined.1 The US Mint’s year-to-date sales are now up 79% from the same period in 2012.

Coin dealers in Tokyo and Dubai reported an immediate spike in sales following the gold smash this past Friday. Reuters writes, “A week ago, as the yen-denominated price neared a new peak, jewelry stores and gold merchants across Japan saw long lines of mostly older Japanese looking to cash in on unwanted jewelry and other items that they had held for years… But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as long as three hours for a chance to complete a transaction.”

In Dubai, jewelry outlets reported they are now temporarily out of gold coins and all sizes of gold gram “biscuits”.2

In India, retailers also saw an immediate surge in demand following the price decline, prompting some retailers to predict up to a 50 percent spike in sales volume in the upcoming marriage season.3 The Wall Street Journal quoted a jewelry salesman in Mumbai’s Zaveri Bazar, who stated, “We have not seen such strong demand in many years. Our order books are already 30%-40% more than last year’s festival day… We don’t have enough staff to keep up with this kind of mad demand.”4

We have also seen the same reports coming from the Perth Mint in Australia, and even here in Toronto, where the line-up at Scotia Mocatta’s bullion desk numbered more than one hundred long on Wednesday. A colleague confirmed that virtually all participants where there to buy more bullion, rather than to sell.

This phenomenon clearly appears to be happening globally. A friend of the firm had this to report from Hong Kong: “Went to Hang Seng bullion counter yesterday. The line was out the door. It took an hour wait to see a teller. When I asked if people were buying in the dip or selling in panic, she told me that they haven’t had once ounce of gold sold back to them all day. She told me they have sold more gold in 24 hours than they normally do in three months. Yes, there was a lot of extra security. The guy in front of me bought over $1 million USD in gold. He paid in cash and walked out of the door with the bullion in a Nike bag. Amazing.”

Regardless of one’s view on gold, one must admit that this kind of buying frenzy defies the traditional rules of investor psychology. After two days of what looked like outright panic selling from precious metals futures participants and ETF holders, we wouldn’t expect to see such a massive surge in physical bullion demand from individuals across the world. When gold fell precipitously in 2008, there was no such reaction.

For now, all we can conclude is this: There is definitely a striking psychological disconnect growing between the buyers of physical gold and silver, and the financial community that trades precious metals through ETF’s and futures contracts. While the latter have ostensibly turned their back on gold (see the plethora of negative sentiment expressed by various pundits over the past three days), the former group has been spurred into action as if they know something the other group does not. Certainly we wouldn’t expect individuals to be buying these metals if they believed the price was going to drop further, or perhaps they don’t care either way and simply want to own something tangible. Nonetheless, it is a wholly peculiar phenomenon, and it is definitely not the same investment behavior we have seen before.

We still don’t know what entity chose to crush the gold price with a 400 tonne sell order last Friday. Certainly no rational group would dump that much paper gold on the market without a pre-established desire to torpedo the gold price. Their efforts clearly worked in the short-term, but the reaction from physical buyers strongly indicates an official bifurcation between physical metals investors and the exchange-oriented investors who trade gold through financial products.

The days to come will prove if this surge in physical Gold demand is an aberration, or the beginning of a new chapter for the physical gold market.

If it represents the latter, precious metals investors may be wise to ignore the ‘paper’ price of gold altogether. The line-ups in 1980 represented the top of the gold bull market. But what do line-ups for gold represent when the price has already fallen 30% from its all-time high? That’s the question, and we’re guessing it means this current gold bull market isn’t close to being over.